When buying, selling, or refinancing a home, an appraisal of the property is important. When purchasing a property, it validates the acceptability of the purchase price vs. market prices. Banks need appraisals to ensure there is sufficient collateral for the loan and that there are no health and safety issues or repairs needed.
What is a Home Appraisal?
Conducted by a licensed real estate professional, this determines the fair market value (FMV) of a property. Simply put, FMV is the price a buyer would pay a seller in an open market. Kris Farwell, Director of Mortgage at Coulee Bank says, “It is important to remember an appraiser is an independent third party who conducts the on-site visit. Lenders order their services through an appraisal management company so there is no outside influence on the appraiser.”
The appraiser reviews the home’s features, age, size, and condition and reviews comparable homes that have sold recently to ensure timely valuation. Remember, just because a home is close to your property does not mean it’s necessarily comparable (new construction vs. a 20-year-old home that’s the same size). This is typically completed when a home is being sold or refinanced.
Is An Appraisal Necessary?
An appraisal is essential. As a seller, an assessment helps determine a realistic asking price, but a real estate agent can also help determine this without paying for an appraisal. As a buyer, it helps protect you from overpaying or buying a home with issues. Farwell says, “Issues could include evidence of termites, mold, leaky roofs, or subpar electrical or plumbing. You definitely want to know about these issues before buying.”
If you are refinancing your home, you need to get an appraisal because its value may have changed depending on upgrades or how long you have owned it. She says a home needs to appraise at or above the amount you estimate to refinance at a loan to value (loan as a % of the value) that is eligible. As an example, in the housing market crash of the early 2000s, many homes lost significant value, and refinancing became very difficult as homeowners owed more on their homes than they were valued at.
How Long Does the Appraisal Take?
The on-site home visit takes anywhere from 20 minutes to a couple of hours. The timing depends upon the size of the property being assessed. After the physical inspection, the appraiser researches the value of similar homes in the neighborhood that have recently sold.
Farwell states, “After researching other homes, the appraiser compiles the information into a written appraisal report. This can take on average seven to 10 days.”
Who Pays for an Appraisal?
This depends on the situation. If you are refinancing your home, you pay for the appraisal. If you are a buyer, you are typically responsible for paying for the appraisal. However, this can be negotiated during the sale of the home.
What Happens if a House Doesn’t Appraise for its Sale Price?
Should the appraisal come in lower than the asking price, your mortgage lender may not lend you more than the appraised amount. You have a couple of options, you can either negotiate a lower sale price, pay cash to cover the amount over appraisal, or choose not to move forward with the purchase.
Understanding the appraisal process can alleviate stress and make the buying or selling experience smoother and more transparent. By being informed and prepared, you can confidently navigate this critical step towards achieving your homebuyer journey.
Reach out to Kris Farwell and her team if you are ready to purchase a home.
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